Global Finance Celebrates at the Gates of Paradise

Erinc Yeldan

In the episode The Apple, of the classic TV series Star Trek, our heroes, led by Captain Kirk and Mr. Spock, land on a paradise planet inhabited by seemingly peaceful and immortal humanoids. At first, the bounties of the planet dazzle the Enterprise crew, but they soon discover that the planet is actually trying to kill them. Eventually, their investigations lead them to the discovery of an all-controlling artificial “god.”

Witness the reaction of the global “markets,” the artificial gods of global capitalism, to the Fed’s reassuring announcements that it will postpone the withdrawal (or “taper”) of the so-called quantitative easing (QE) packages. It mirrors, in many ways, the drama that played out on that unknown planet, where no one has gone before.

The first of these monetary stimulus packages was introduced on November 25, 2008, not long after the collapse of the Lehman Brothers that September. Due to mainstream ideological dogmas and obsessions—which we do not have time or space to dwell on—such stimuli were launched under the mystical-sounding term, quantitative easing, rather than plain monetary expansion. The first QE injected, over a course of a few months, in excess of $1 trillion dollars into the global markets, before it was phased out in March 2010. This episode was replayed with the announcement ofQE2 on August 27 of the same year. Currently, we live under the auspices of the so-called QE3, announced on September 13, 2012.

As we know (and teach) from basic principles course material, such monetary expansion soon ought to haunt the macroeconomic equilibrium with price inflation. Inflation is the most direct enemy of financial arbitrageurs, as it instantly erodes the real values of financial assets. Hence, the ongoing inflation phobia, pressing the central banks for targeting inflation as their primary or sole policy objective.

What was (positively) surprising for finance capital, however, was that such expansion did not lead to any meaningful inflationary pressures. Global inflation, according to the IMF’s World Economic Outlook (WEO), hovers around 2.9% over 2012 and 2013, and is projected to remain stable around 3.2% over 2014-17. Inflation in the advanced countries in particular, is expected to remain low—less than 2% annually—and that of the emerging markets is still a modest 4.8%, over the same horizon.

There are, of course, many causes of this, some of which I discussed in a previous contribution to this blog (“The Inflation Dog” Didn’t Bark, But What About The Others?, April 2013). There, I argued that over the last two decades of the last century we have probably witnessed one of the most decisive shifts in the global division of labor in human history. As the United States and continental Europe claimed to become post-industrial, high-technology, service economies producing “finance,” global manufacturing shifted to the sweatshops of East Asia. As the global markets were flooded with cheap consumer durables, the United States alone mopped up $2 trillion of the $3 trillion worth of aggregate current account surpluses from the global asset markets. This huge income transfer by way of financial strangulation enabled the “West” to suppress global wage demands and maintain low inflation, while unemployment got entrenched at historically record high levels.

Thus, what is left for finance capital have been the “gains,” i.e., the revaluation in asset prices. Data compiled recently by the Financial Times reveals that initial gains were indeed substantial under the first QE. However, the ongoing QE3 has so far failed to tally points on the casino’s scoreboard. (See Table 1 below.) Under the first QE, the most significant rise was observed in emerging market securities, with growth of 108%. The high-yield securities of the U.S. market followed suit. Commodity prices also ballooned—copper prices by 112%; crude oil by 67%, and gold by 37%. Abundant and cheap liquidity had swelled asset and commodity prices.

Such gains have not lasted, however, as we approach the fifth year of the QE saga. The effect of QE3 on emerging-market securities has been a modest 3%; while the gains on American securities were only 9%. Commodity prices, in turn, tumbled as speculative ventures eroded.

What is left for the “markets” now is an addictive lust for higher and higher volumes of liquidity just to maintain the frenzy in the asset markets. Nowadays, even whispers about the end of QEs produce shudders among the arbitrageurs, while the marketeers seem to have a basic instinct of applauding the “bad” news of further recession in the real sector. This is simply because of the expectations that the Fed will not taper back on its QE saga, as long as unemployment remains high and the stagnation continues to deepen.

I believe that, even in the imagined worlds of science fiction, the system of real values and speculative expectations had not diverged to this extent. Welcome to the world of financial paradise wherein the financial “gods” are speculating away, at the tables of the global casino, the funds that could have been utilized in expanding physical capital and employment.

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